Ship Breaking

Pre-Feasibility Study
S SH HI IP P B BR RE EA AK KI IN NG G
Small and Medium Enterprise Development Authority
Government of Pakistan
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December, 2005
Pre-Feasibility Report Ship Breaking
PREF-X/DEC, 2005/RevX
DISCLAIMER
The purpose and scope of this information memorandum is to introduce the subject
matter and provide a general idea and information on the said area. All the material
included in this document is based on data/information gathered from various sources and
is based on certain assumptions. Although, due care and diligence has been taken to
compile this document, the contained information may vary due to any change in any of
the concerned factors, and the actual results may differ substantially from the presented
information. SMEDA does not assume any liability for any financial or other loss
resulting from this memorandum in consequence of undertaking this activity. Therefore,
the content of this memorandum should not be relied upon for making any decision,
investment or otherwise. The prospective user of this memorandum is encouraged to
carry out his / her own due diligence and gather any information he/she considers
necessary for making an informed decision.
The content of the information memorandum does not bind SMEDA in any legal or other
form.
DOCUMENT CONTROL
Document No. PREF-X
Revision X
Prepared by SMEDA-Sindh
Approved by Provincial Chief - Sindh
Issue Date Dec, 2005
Issued by Library Officer
PREF-X/Dec, 2005/RevX
1 1 P PU UR RP PO OS SE E O OF F T TH HE E D DO OC CU UM ME EN NT T
The objective of the pre-feasibility study is primarily to facilitate potential entrepreneurs
in project identification for investment in ship breaking. This project pre-feasibility may
form the basis of an important investment decision and in order to serve this objective,
this document / study covers various aspects of project concept development, start-up,
operations and business management of ship breaking and scrap business. The document
also provides sectoral information, brief on government policies and international
scenario, which have some bearing on the ship breaking industry as a whole and the
project itself.
This particular pre-feasibility is regarding Ship Breaking & Scrapping sector. The
report provides an overview of the driving mechanisms of the ship breaking and
scrapping industry. The overview is focused on the economics of the ship scrapping
industry and aims at describing the interaction with the other shipping markets and
providing insight into the forces that determine when and where ships arescrapped. Key
drivers behind the ship owners' supply of vessels for scrap andthe ship scrapping yards'
demand for the same are addressed separately. Finally, the dynamics and equilibrium of
supply and demand are discussed. The information in this section serves as a reference
for the analysis of the historical developments in the ship scrapping industry and the
projections of thefuture volumes of ship scrapping under different scenarios.
Before studying the whole document one must consider following critical aspects, which
forms the basis of any investment decision.
2 2 C CR RU UC CI IA AL L F FA AC CT TO OR RS S & & S ST TE EP PS S I IN N D DE EC CI IS SI IO ON N M MA AK KI IN NG G F FO OR R I IN NV VE ES ST TM ME EN NT T
The ship breaking industry (which has not yet been declared as an industry in Pakistan)
has been a well reputed sector and a major source of steel supply to the local re-rolling
mills especially during eighties. However, the scenario has been totally changed; ship
suppliers have directed their attention toward Bangladesh, India and China due to high
price offers which is around $300 to $450 per ton. In addition the import duty on scrap
ships in Pakistan is 25% whereas in the neighboring countries it is just 11%. The two
reasons have badly hindered the progress of shipbreaking industry in Pakistan.
The following critical key factors need to be considered before entering the ship breaking
and scrapping market tominimize associated risks:
Demand for steel and other reusable items: When the demand for steel and other
reusable items increases, the ship scrappers' earning potential increases. Hence, the
ship scrappers willingness to pay for a vessel for decommissioning increases (and
vice versa with the weakening in the demandfor steel and other reusable items)
Running costs which to a large extent is determined by local conditionsplay a crucial
role for the demand of vessels for decommissioning. An increasein either of the cost
items listed below will shift the demand curve downwards, i.e. lower the ship
scrappers willingness to pay:
o Labor costs play, and have played a crucial role for the ship breaking industry.
Giventhe current practice used, ship breaking is a very labor- intensive industry.
o Waste disposal costs: Decommissioning involves large waste quantities for
disposal.
o Costs implied by regulation (health, safety & environment): Regulation also
influences demand as higher requirements regarding health, safety and
environmental issues increase the costs of ship scrapping. Though in Pakistan and
neighboring countries the environment and health safety regulations are not so
strict or they may not be followed by the shipbreakers.
o Import duties, levies and taxes: Ship scrappers which are subject to high duties,
levies and taxes are less competitive compared to countrieswith no or low taxes.
o Capital costs play an insignificant role in present markets due to the basic nature
of the industry. There is a potential of increasing productivity by using better
technologies in the industry, but this will require largeinvestments, which do not
seem to be competitive to the current practiceused.
o Infrastructure: The better the infrastructure (roads, distance to users [buyers] of
steel, access for the labor force etc.), the lower the running costs. This
infrastructure is available at Gaddani-the prime shipbreaking site in Pakistan.
o Exchange rates: Exchange rates naturally affect the competitiveness of theship
scrapping yards , as the costs of the ship scrapping yard are paid in local currency
(except for the vessels for decommissioning).
3 3 P PR RO OJ JE EC CT T P PR RO OF FI IL LE E
3 3. .1 1 O Op pp po or rt tu un ni it ty y R Ra at ti io on na al le e
Like every business, Ship breaking also depends on demand and supply function.
Pakistan needs more than 40 million tonnes of steel in the next fiscal year
1
while it has
installed capacity of steel productionat Pakistan Steel Mills of around 1 million tones. In
addition, further expansion in production capacity in Pak Steel would increase it to 1.5
million. The installation of a new mini steel mill at Port Qasim by Saudi Arabia's Al-
Tawarki Group would enable the steel production industry to reach 2 to 2.5 million
tonnes. Still there would be gap in demand and supply of steel which could be bridged by
traditional shipbreaking industry.

1
http://www.jang.com.pk/thenews/may2005-daily/21-05-2005/business/b8.htm
Shipbreaking industry depends on availability of scrap ships. Every year around 600-700
larger sea vessels are taken out of service and brought to Asia for scrap. In the 1990s they
had an aggregate tonnage of around 15 million dwt (dead weight tonnage) a year.
However, the scrap market increases and will increase substantially the following years.
In 2001 the total number of vessels (608) sold for scrap already totaled a figure of 28
million dwt. This marks a year on year growth of nearly 25% for Asian Countries like
Pakistan, China, India and Bangladesh where more than 90% of world ship breaking
occurs.
Given that some ships must be scrapped after 20-25 years for safety reasons, the supply
side for these vessels is easy to calculate since the age of the existing fleet is known. In
1998 - a bumper year - a total of 673 ships or 27,254,525 dwt were scrapped, and in 1999
it remained about the same. The average age of the 88,000-strong fleet has reached 19
years at the end of 2000. To maintain this average would require the annual scrapping of
almost 1,900 vessels a year with an average age of 25 years, which would be three times
1998 ship scrapping rate.
The above statistics are evident of good investment potential in the ship breaking
business. However, reduction in the current duty structure (which is 24%) and tax
relaxation would be necessary to compete in the international market since the scrap ship
prices are increasing (around $300-$450 per tonne).
3 3. .2 2 P Pr ro oj je ec ct t B Br ri ie ef f
Ship breaking is the process of dismantling an obsolete vessels structure for scrapping or
disposal. Conducted at a pier, dry dock or dismantling slip, it includes a wide range of
activities, from removing all gear and equipment to cutting down and recycling the ships
infrastructure. Ship breaking is a challenging process, due to the structural complexity of
the ships and the many environmental, safety, and health issues involved.
The scraping work needs huge labor and capital; scrapping operations involve high risks
and problems. So, the owners of the vessels prefer to sell out the unserviceable vessels to
the countries where there is demand for scrapped steel and other items of old ships, where
labor cost is relatively low and where there is less concern about hazards, toxicity and
environmental pollution. Thus, ship owners who want to get rid of their unserviceable
vessels contact the concerned business community who look for cheaper steel and other
items of the ships. These two parties transact a good business of selling and buying of
unserviceable vessels at a point.
3 3. .3 3 P Pr ro op po os se ed d B Bu us si in ne es ss s L Le eg ga al l S St ta at tu us s
The government policies in Pakistan have been inconsistent for ship breaking industry
during the past years. Most of the businessmen in this industry prefer to take it as side
business
2
(though still they remain in steel business), since the business highly depends
on the availability of scrap ship which can not be ensured without good industry contacts
(scrap ship suppliers and brokers), and competitive and consistent internal economic
policies. In addition the business involves huge investment and finance when a buying
deal is being made. This need of finance would be done in a setup where more than one
investment party is involved. Therefore, a partnership setup for ship breaking business
would be proposed.
3 3. .4 4 P Pr ro oj je ec ct t C Ca ap pa ac ci it ty y a an nd d R Ra at ti io on na al le e
It is important to clarify a few points regarding supply and demand in relation to the term
capacity.
Quantity is sometimes mistaken for capacity. However, the quantity observed in the
market is merely the volume provided at that specific point in time to match supply. It
says nothing about the maximum quantity or capacity that the ship scrapping yards can
handle. In this report, the term capacity is used only in relation to discussions about
constraints to the number of ships the ship breaking site can hold and scrapping yards can
process. In Pakistan most of the breaking activities are generally done in open sky;
therefore, no specific infrastructure is required for storage and processing. Generally the
transportation of scrap material and production process is synchronized. After the
reasonable stock is available to transport, parties from re-rolling mills are ready to take
the delivery.
Regarding the capacity of decommission of ships, there is no evidence that there have
been any capacity constraints in the industry historically, which have seriously affected
prices or volumes of scrap. If the current practice continues in the future, no capacity
constraints are foreseen, as decommissioning with the currently applied practice only
requires a suitable beach, plenty of labor and a hinterland force requiring steel - all of
which seems to be readily available in Pakistan. Rather than capacity constraints, it
seems that the key drivers behind supplyand demand for ships for decommissioning have
determined the historical level of scrapping and scrap price.
Based on the historical scenario in the Pakistani ship scrapping market, ship breaking
industry has been providing around 1 million tonnes of steel to the local re-rolling mills
which was totally based on the availability of scrap ships rather than the installed
processing capacity. Therefore, for the purpose of this pre-feasibility it is assumed that at
least one light ship would be purchased in a year with the weight of 1000-1500 Tonnes.
3 3. .5 5 P Pr ro oj je ec ct t I In nv ve es st tm me en nt t
The total cost of the project would be around Rs. 94,296,250/-. Working capital
requirement would be around Rs. 79,370,250/- and the rest would be the fixed capital.

2
Based on discussions with the existing Shipbreakers
3 3. .6 6 O Ou ut tp pu ut t P Pr ro od du uc ct ts s/ /P Pr ro od du uc ct t M Mi ix x
In the businesses like Ship breaking, output products of the business are very structured
and defined
3
. It solely depends on what type of ship has been brought to be shredded. For
this pre-feasibility study we have assumed a cargo or passenger ship would be scrapped;
therefore, output would be as follows:
S.No. Component
%age of
total
1 Ship plate and profiles of 1/2" Thickness and above 40%
2 Ship plate and profiles of 3/8" Thickness and above 20%
3 Second quality re-rollable scrap of short lengths 15%
4 Small irregular pieces and re-meltable scrap 15%
5 Cast iron, pipes or cast steel 8%
6 Non-ferrous metals 1%
7 Stores or machinery 2%
3 3. .7 7 R Re ec co om mm me en nd de ed d P Pr ro oj je ec ct t P Pa ar ra am me et te er rs s
Capacity Human Resource Technology/Machinery Location
Installed Capacity
1000-5000 Tonne
No. of employees
9 Permanent and 16
Contractual staff
Local/Foreign
Mixed
Suitable
Locations
Gaddani, Karachi
Financial Summary
Project Cost ROI NPV Payback Period Cost of Capital
Rs. 94,296,250 30% - 1 Year -
Investment in Ship breaking is considered to be for a short period and in cycles, i.e. an
entrepreneur would purchase a scrap ship, scrap it, sell the scrap in the market, realize the
sale proceeds, pay off the creditors and the balance, if any, works out to be his surplus.
The cycle is repeated, if the entrepreneur wishes to buy another scrap ship. Hence, the
ship breaking business is different from a typical manufacturing or services entity.
3 3. .8 8 P Pr ro op po os se ed d L Lo oc ca at ti io on n
The choice of location for the establishment of scrapping sites rests upon some priority
requirements as follows:
A long uniform inter-tidal zone/ sufficient tidal difference (allowing vessels of a
rangeof sizes to be dry-beached)
Minimum exposure (coastal protection) and stable weather conditions
Availability of low cost labor
A certain level of infrastructure

3
Ship-breaking Industry (Special Procedure) Rules, 1997
All above requirements are fulfilled by Gaddani Ship Breaking Site.
3 3. .9 9 K Ke ey y S Su uc cc ce es ss s F Fa ac ct to or rs s/ /P Pr ra ac ct ti ic ca al l T Ti ip ps s f fo or r S Su uc cc ce es ss s
In the Ship Breaking business, an entrepreneur who has got the lead information on
availability of breakable ship and has cemented the buying deal in least possible time, is
likely to be successful in this business. The minimumthe difference between the timing
of information regarding availability of scrap ship and deal finalization, the higher will be
the success chances for the business. Ship buying deal, negotiation and close interaction
with the international scrap ship (demolition) market are considered to be the rule of
game in Ship Breaking business. The availability of latest information on ships ageing
and phase out plan of various shipping companies and geographical location around the
globeis regarded as a critical success factor.
4 4 S SE EC CT TO OR R & & I IN ND DU US ST TR RY YA AN NA AL LY YS SI IS S
4 4. .1 1 T Th he e B Bu us si in ne es ss s C Cy yc cl le e o of f t th he e S Sh hi ip pp pi in ng g M Ma ar rk ke et t
Business cycles occur in most industries. Also in shipping, the business cycle is an
integrated part of the business. The business cycle plays a crucial role in fostering an
efficient working industry by forcing the weakest and most poorly managed companies
out of business during the downturns, leaving only the most efficient companies in
business.
Basically the shipping industry consists of four markets:
The new building market trades new vessels
The freight market trades sea transport services
The sale and purchase market trades second-hand vessels
The demolition market trades old and obsolete vessels.
The dynamics of the business cycles in shipping is a very complex matter, as a wide
range of factors influence the fluctuations and because the four markets are closely
interconnected. The shipping market in general is operating under business cycles with
up and downswings with a cyclical behavior. By managing risk and return on market
investments, the business cycles play a central role in balancing the economics of the
entire shipping industry.
4 4. .2 2 D De em ma an nd d & & S Su up pp pl ly y
The demand and supply in each market are, as mentioned, closely interconnected. If, for
example, only few new ships are built and the demand for sea transport services increases
(for example due to an upswing in the global economy) the price for sea transport
services will increase. This will affect both the second-hand market and the demolition
market. The price for second-hand ships will increase reflecting the higher earning
potential and fewer ships will be sold for scrapping, also affecting the price in the
demolition market. This will lead to an increased activity in the new building market and,
eventually, to a downward pressure on the price for sea transport services due to the
increased supply of sea transport service.
The demolition market plays an important role as a buffer balancing demand and supply
in the freight market. During a recession, the global demand for sea transport services
stagnates or declines, which creates an overcapacity in the freight market leading to
increased scrapping, thereby balancing out demand and supply. During an upturn in the
business cycle the reverse occurs, as described above.
Predicting the development in the four shipping markets or in the business cycle is
essentially what shipping is all about. However, predicting the cycles are very complex as
many factors influence the four markets and thus the business cycles. Historical evidence
shows that the [business] cycles are not regular.
4 4. .2 2. .1 1 S Su up pp pl ly y o of f V Ve es ss se el ls s f fo or r S Sc cr ra ap pp pi in ng g
The main cash inflow for ship owners is freight revenue. However, the ship owners also
receive positive cash inflow from the demolition market when selling ships for
demolition. If the ship owner's decision on when to scrap a given vessel is not subject to
any constraints, the ship owner simply evaluates the expected future earning potential and
the expected cost of keeping the vessel in operation against the price obtainable when the
vessel is sold for scrap.
When the revenue from selling the vessel for scrap outweighs the difference between the
future earning potential and running cost, the ship owner will find it optimal to sell for
scrap. Given that the earning potential declines and the cost of keeping the vessel in
operation increases as the vessel ages, the price a ship owner requires for selling the
vessel for scrap declines, the older the vessel is. An important factor in this consideration
is the cost of taking the ship through international contacts in the four markets, which
widens in scope when the vessel ages.
Regulatory requirements naturally interfere with this. If, for example, the ship owner's
decision is subject to age limitations , the ship owner can be forcedto supply the vessels
to the ship scrapping yards earlier than he would otherwise find optimal. Ignoring the
cost of transporting the vessels to the ship scrapping yard (and possible regulation or
company policies), the ship owner is presumably indifferent about where to scrap. The
ship owner will simply choose to scrap the ship at the ship breaking yard offering the
highest price.
Five key factors for the supply of vessels for scrap can be identified.
The future earning potential: If the general market conditions in the freight
markets improve, the supply curve shift upwards, as high earnings encouragethe
ship owners to keep trading. Accordingly, ship owners require a higher price to
sell a vessel to the ship scrappers when the freight markets are strong (and vice
versa for a decline in the future earning potential).
The cost of keeping the ship in operation: If the cost of keeping the ships in
operation increases (for example due to higher bunker/fuel cost, higher cost of
survey etc.), the supply curve shifts downwards, as ship owners would then
require a lower price to sell a vessel to the ship scrappers (and vice versa for
declining cost of keeping thevessels in operation).
Age profile of existing fleet: The supply curve shifts downwards the larger the
share of old vessels is. The reason is that the earning potential declines and
running cost increases the older the vessel is. Accordingly, ship owners will, on
average, require a lower price to sell to the ship scrappers if the share of old
vessels is high (and vice versa for a smaller share of old vessels).
The size of the current fleet: Keeping other things equal, the constant increasein
the world-fleet leads to an increased supply of vessels for thedemolition market.
Regulation: Regulatory issues, like phase out regulation, port state controls,
statutory surveys, vetting systems etc., affect the demolition supply curve. These
are factors that did not exist in the past, but are gaining importanceat the moment
for the key decision: whether to invest in the maintenanceand follow operation or
to sell the vessel for scrap. Accordingly, one key consideration is that increased
maritime safety will likely lead, asa side effect, to increased scrapping activity.
4 4. .2 2. .2 2 D De em ma an nd d o of f V Ve es ss se el ls s f fo or r S Sc cr ra ap pp pi in ng g
The decision of a (potential) ship scrapper to enter the market by buying a vessel for
scrap is heavily influenced by the possibilities of selling the steel and other reusable items
from the ship and the ship scrappers cost structure. If for some reason revenue declines (if
for example the price of steel or other reusable items declines) and/or the running cost of
the ship scrapper increases, the ship scrapper will require getting the vessel for scrap at a
lower price. Otherwise the ship scrapper will step out of the market.
Running costs, i.e. labor costs, taxes, capital costs, infrastructure, environmental
requirements etc., are heavily influenced, and thus determined, by local conditions. The
same goes for the revenue side. In developing countries like Pakistan, the demand for
steel and other reusable items is high, i.e. revenue possibilities are likely to be better due
to the accelerated economic growth. Accordingly, ship scrappers in some
countries/regions will be able to offer a higher price for a given vessel, if their costs are
lower and/or revenue possibilities are better.
As the ship owners are assumed to be indifferent to the location of ship scraping yard, the
above mentioned factors influencing the demand side, determines this. The activities of
the individual ship scrappers are aggregated to give the total demand at any given price.
The critical factors (mentioned in Section 2) influencing the demand of ships for
decommissioning are the key to understanding the pattern of decommissioning world-
wide today and in the past. With no restriction of ship owner's decision on where to
scrap, this is determined by which ship scrapper offers the best price. Ship scrappers with
"high costs" due to, for example, high costs of labor and/or high disposal costs, have no
chance of being in the market as long as ship scrappers with "low costs" have the
capacity of processing the ships supplied to the industry.
4 4. .2 2. .3 3 G Go ov ve er rn nm me en nt t P Po ol li ic cy y D Di ir re ec ct ti io on n
A ship breaker who is not already registered as ship breaker shall apply for registration to
the Collector of Sales Tax having jurisdiction over the area where the ship-breaking is to
be carried out.
The application for registration shall be processed in the Collectorate and a certificate of
registration shall be issued to the applicant in accordance with Registration, Voluntary
Registration and De-registration Rules, 1996.
The CBR has accordingly issued two notifications whereby value of 'ships for scrap' has
been fixed at $300 per LDT for the purposes of calculation of sales tax at the import stage
in terms of Clause (46) of Section 2 of the Sales Tax Act, 1990. As per the SRO
76(I)/2005, an amendment has been made in Chapter XIII of the Sales Tax Special
Procedures Rules 2004 to reduce the mandatory value-addition from 14 percent to 5
percent for the purposes of payment of sales tax on local supply of the scrap obtained
from ship-breaking.
It is expected that the measures would reduce the landed cost of ship-scrap by around Rs.
1,300 per metric tonne and thereby enable the ship-breakers to bid for higher purchase
price in the world market.
This relief will, however, be available to those imports only where the declared value of
'ships for scrap' is more than $300 per LDT and would continue for a period of three
months only after which it will be reviewed in consultation with the Pakistan Ship-
Breakers Association.
The announced relief package is expected to result in the revival of the ship-breaking
industry, and is anticipated to provide jobs to thousands of persons and cheap scrap for
use by the re-rolling mills while making the used refrigerators and air-conditioners
available for use in offices and houses. This would help stabilize the market price of steel
and iron bars, and ease the pressure on the construction sector.
The government has also reduced with-holding tax from 3% to 1% and has lifted duty
(5%) which will also give a relief to the industry whereas the break up of the duty and
taxes (around 24%)
4
to be paid is as follows:
40% at the time of issuance of Ship beaching permission
30% with in one month of the commencement of operations
30% after one month
Generally a ship inspection is carried out by the officials of PNSC and Ports & Shipping
Division of the government of Pakistan.
5 5 M MA AR RK KE ET T I IN NF FO OR RM MA AT TI IO ON N
5 5. .1 1 M Ma ar rk ke et t D Dy yn na am mi ic cs s
The balance between supply and demand in the ship scrapping industry is ever changing.
The effect of changes in the key drivers of the industry is described below (not the price,
as this is endogenously determined by demand and supply). The description of changes in
the key drivers primarily focuses on the consequences in the demolition market.
Freight rates
Freight rates heavily influence the price of ships for demolition. Peaks in the freight
rates are transmitted to the demolition market with a small delay, reducing the supply
of ships for demolition, as higher freight rates make it more attractive for the ship
owners to keep their vessels in operation. Technically, higher freight rates will shift
the supply curve upwards, eventually, leading to increased prices and fewer ships sold
for demolition. The new equilibrium is found where the "new" supply curve intersects
the demand curve.
Phase out schemes
Regulation that put certain restrictions on the use of ships will affect the market
equilibrium. A regulation calling for phase out of ships before the ship owners would
otherwise find it optimal to scrap will increase the supply of ships for demolition.
Technically, this will shift the supply curve to the right, eventually, leading to lower
prices and more ships sold for demolition.
A phase out scheme increases the volume of ships that are decommissioned, which
means that more demand will be satisfied. Thus, more ship scrappers will be in the
market, or more of the less efficient capacity of existing ship scrappers will be
utilized. If it is assumed that "low cost" ship scrappers are not able to process more
ships, demand from "high cost" ship scrappers (for example European shipyards) may

4
Based on our discussions with the existing ship breakers
be satisfied. As mentioned, this could imply that the equilibrium price declines below
zero.
A phase out scheme might affect both the freight markets and the new building
market. When more ships are scrapped, the supply of sea transport services declines
leading to increased freight rates, which will ultimately lead to increased demand for
new vessels (and, eventually, a higher supply of sea transport services).
Fluctuations in steel prices
Prices of recycled steel influence the price that ship scrappers can pay for a ship for
demolition. If prices of recycled steel increases, the ship scrappers will be willing to
pay more for the vessels, increasing the demand for ships for demolition. Technically,
this will shift the demand curve to the right, eventually, leading to higher prices and
more ships sold for demolition.
A higher level of decommissioning will result in more recycled steel on the market,
which could, eventually, affect the price of recycled steel. However: "recycled steel
from ships forms an insignificant share of total steel production, as well as of the
global supply of recycled steel". Hence, the price for steel can be considered as
exogenous in this context, i.e. the steel price is not significantly affected by the
developments in the ship demolition market.
Health, safety and environmental regulation
When new regulation regarding health, safety and environmental aspects is
introduced in the ship scrapping sector, the demand curve is affected. General stricter
regulation will increase the costs of scrapping a ship, reducing the demand of ships
for demolition. Technically, this will shift the demand curve to the left, eventually,
leading to lower prices and fewer ships sold for demolition.
Health, safety and environmental issues are often implemented locally, whereas the
market for demolition of ships is global. Hence, it is likely that new regulations will
only affect part of the ship scrappers that form the total demand curve.
Technically, a regulation that only affects some of the ship scrappers will simply
lower these ship scrappers' willingness to pay. A new aggregated demand curve will
be formed with a shape that has been pushed downwards compared to the starting
point. The new equilibrium will have a lower price and fewer ships sold for
demolition, if ship scrappers that were originally "above the equilibrium point" are
affected by the regulation. Moreover, local regulation may push some of the ship
scrappers out of the market, because they are no longer competitive, i.e. the price that
they are willing / able to pay for a ship for decommissioning is lower than the
equilibrium price.
Market interactions
It is fair to assume that ship owners will sell ships for demolition to the ship scrapper
paying the highest price, as long as there are no specific reasons to act differently.
Accordingly, without further market interactions, it will primarily be the "low cost"
ship scrappers that are in the market.
However, regulation can be used as a means to provide a sufficient incentive for the
ship owners to sell their ships to ship scrappers complying with specific safety, health
and environmental criteria, such as the IMO, ILO and Basel Convention guidelines
for ship scrapping. One way could be to simply subsidy "high cost" ship recyclers
(for example European ship recyclers) so that they can offer prices for ships for
decommissioning that are competitive to the prices offered by ship scrappers from
"low cost" countries. Technically, a properly applied subsidy-scheme to European
ship recyclers will increase the price that they are willing to pay for ships for
decommissioning. A new aggregate demand curve will be formed where European
ship recyclers will be in the market. Another way would be to simply use "command
and control" regulation forcing ship owners to scrap in certain countries/under certain
conditions. However, without world wide support, command and control regulation
will probably only have little effect.
5 5. .2 2 G Gl lo ob ba al l S Sh hi ip p B Br re ea ak ki in ng g / / S Sc cr ra ap pp pi in ng g M Ma ar rk ke et t
The tables show that in the past 10 years decommissioning of ships have been heavily
concentrated to countries in the Indian Sub Continent and Asia.
Total hist orical ship scrapping volumes (all types) by region and year
(Million LDT, Million DWT and number of vessels)
5
Scrap
Location
Unit 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Other Total
Banglad
esh
mLDT
mDWT
No.
0.5
3.1
25
0.6
3.9
31
0.9
4.6
61
0.7
3.2
63
1.1
5.8
66
1.2
7.2
65
0.8
4.2
61
1.7
9.5
123
1.4
8.7
69
0.7
4.1
39
0.0
0.0
0
9.6
54.2
603
India
mLDT
mDWT
No.
1.3
65
107
1.4
6.1
148
2.2
8.8
262
2.1
7.7
293
2.8
10.0
360
2.8
10.6
340
2.1
8.1
274
2.2
8.1
298
2.9
11.1
326
1.9
7.6
229
0.0
0.1
1
21.7
84.7
2,638
Pakistan
mLDT
mDWT
No.
0.6
3.7
19
0.5
3.1
20
0.3
2.0
16
0.2
0.9
14
0.6
3.4
40
0.7
4.3
34
0.2
1.2
16
0.6
3.7
26
0.3
1.7
13
0.2
1.0
14
0.0
0.0
1
4.0
24.9
213
Indian
Subconti
nent
mLDT
mDWT
No.
0.1
0.9
6
0.1
0.4
2
0.1
0.6
9
0.3
1.4
18
0.3
1.1
24
0.1
0.8
9
0.1
0.6
7
0.1
0.5
5
0.0
0.1
1
0.0
0.2
2
0.0
0.0
0
1.2
6.6
83
China
mLDT
mDWT
No.
0.5
2.8
34
0.2
0.9
19
0.1
0.3
13
0.0
0.1
6
0.5
2.1
48
1.0
5.4
72
1.1
5.7
77
1.1
5.7
76
1.3
5.9
90
1.5
8.2
79
0.1
0.1
9
7.4
37.1
523
Vietnam
mLDT
mDWT
No.
0.1
0.3
3
0.1
0.4
2
0.1
0.2
6
0.1
0.5
3
0.1
0.4
5
0.1
0.3
5
0.0
0.1
4
0.0
0.0
1
0.0
0.0
1
0.0
0.0
0
0.0
0.0
0
0.4
2.3
30

5
A study on the implications of the accelerated phase out scheme of single hull tankers proposed by the EU for the world ship scrapping
and recycling industry- J une 2004
Total hist orical ship scrapping volumes (all types) by region and year
(Million LDT, Million DWT and number of vessels)
5
Scrap
Location
Unit 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Other Total
Other
Asia
mLDT
mDWT
No.
0.0
0.0
0
0.0
0.3
2
0.0
0.0
1
0.0
0.1
1
0.0
0.0
1
0.0
0.1
4
0.0
0.0
0
0.0
0.0
1
0.00.0
1
0.0
0.0
1
0.0
0.0
0
0.1
0.6
12
EU
mLDT
mDWT
No.
0.0
0.0
2
0.0
0.0
1
0.0
0.0
1
0.0
0.0
3
0.0
0.1
7
0.0
0.1
3
0.0
0.0
3
0.0
0.0
2
0.0
0.0
4
0.0
0.0
1
0.0
0.0
0
0.1
0.3
27
Turkey
mLDT
mDWT
No.
0.0
0.0
2
0.0
0.1
5
0.1
0.2
10
0.1
0.2
12
0.1
0.3
15
0.1
0.6
18
0.1
0.2
14
0.1
0.3
16
0.1
0.3
21
0.0
0.1
12
0.0
0.0
0
0.7
2.3
125
North
America
mLDT
mDWT
No.
0.0
0.0
0
0.0
0.0
0
0.0
0.0
0
0.0
0.0
0
0.0
0.0
0
0.0
0.0
0
0.0
0.0
0
0.0
0.0
1
0.0
0.1
4
0.0
0.0
1
0.0
0.0
0
0.0
0.2
6
South
America
mLDT
mDWT
No.
0.0
0.0
1
0.0
0.0
1
0.0
0.0
0
0.0
0.0
0
0.0
0.0
2
0.0
0.0
1
0.0
0.0
1
0.0
0.0
2
0.0
0.0
1
0.0
0.0
0
0.0
0.0
0
0.1
0.2
9
Mexico
mLDT
mDWT
No.
0.0
0.0
0
0.0
0.0
1
0.0
0.0
0
0.0
0.0
2
0.0
0.1
6
0.1
0.2
8
0.0
0.0
1
0.0
0.0
0
0.0
0.0
1
0.0
0.0
0
0.0
0.0
0
0.1
0.3
19
Other
mLDT
mDWT
No.
0.0
0.0
0
0.0
0.0
0
0.0
0.0
0
0.0
0.0
0
0.0
0.0
2
0.0
0.0
0
0.0
0.0
0
0.0
0.0
0
0.0
0.0
0
0.0
0.0
1
0.0
0.0
0
0.0
0.0
3
Unknow
n
mLDT
mDWT
No.
0.1
0.8
14
0.0
0.1
8
0.2
1.0
22
0.3
1.1
32
0.2
0.6
23
0.3
1.5
41
0.4
1.7
34
0.1
0.2
14
0.2
0.6
24
0.2
0.7
15
1.1
4.0
140
3.1
12.3
367
Total
mLDT
mDWT
No.
3.2
18.2
213
3.0
15.5
240
4.0
17.6
401
3.8
15.3
447
5.6
23.9
599
6.4
30.8
600
4.8
21.8
492
5.9
28.2
565
6.2
28.5
556
4.5
21.9
394
1.2
4.2
151
48.7
226.0
4,658
Note: Indian Subcontinent means that it can bein any of the threecountries; India, Bangladesh or Pakistan
Note: 2003 only includes J anuary September
Note: Rounding will display digits <0.05 as 0.0
DWT: deadweight tonnage is carrying capacity of ship in ton (an oil tanker of 200 DWT can carry 200 ton oil)
GT: gross tonnage is content of ship in cubic meters
LDT: light displacement tonnage, almost similar to the net weight of a ship, it is a general used measurement to
calculate the scrap value of a ship. One LDT is equivalent to 1.016 MT.
The above table indicates that the ship breaking in India, Bangladesh, Pakistan, and
China has accounted for more than 90% of the total volume of ships scrapped (LDT).
Only a small amount of ship scrapping has been carried out in Western Europe and other
OECD countries.
Less than 2% of the ship scrapping seen from 1994-2003 has taken place in Europe of
which Turkey alone accounts for more than 85%. The reason for this is simply that the
economics of ship scrapping are not in favor of EU countries. It is not only due to the
higher labor costs and the cost of protecting human health and the environment, but also
due to the fact that the demand for recycled steel and other reusable items from ships is
lower in the EU compared to, for example, the Indian Sub Continent or China. The prices
obtained in third world countries are consequently better on per tones of steel basis (EU,
2000).
The global volume of scrapping is related to the overall size of the world fleet. The
constant increase over the years in the size of the world fleet has led to a general increase
in the supply of ships to the ship scrapping industry, as implied by the table on previous
page. The trend in volumes of ship scrapping has followed the increasing trend in the size
of the fleet. However, it is also evident that there have been large variations over the
years. These variations are determined by the developments in the key drivers of supply
and demand. It is important to bear in mind that the age profile of the world fleet plays a
prominent role.
The following table presents an overview of total number of companies involved in ship
scrapping in different countries according to Lloyds register (Lloyds, 2004). Countries
with more than ten companies are shown in bold.
Bangladesh (50) Belgium (3) Brazil (3)
Canada (1) China (14) Denmark (5)
Egypt (8) Estonia (1) France (3)
Germany (2) Greece (2) Iceland (1)
India (249) Italy (5) J apan (3)
South Korea (1) Lithuania (1) Mexico (1)
Namibia (2) Netherlands (2) Norway (1)
Pakistan (27) Peru (2) Philippines (1)
Portugal (3) Singapore (3) South Africa (1)
Spain (14) Taiwan (7) Thailand (1)
Turkey (20) United Kingdom (9) United States (3)
Uruguay (1) Vietnam (13)
5 5. .3 3 S Sh hi ip p B Br re ea ak ki in ng g I In n P Pa ak ki is st ta an n: : H Hi is st to or ry y & & M Ma ar rk ke et t T Tr re en nd d
Pakistans ship-breaking industry once provided jobs to over 35,000 persons directly and
occupied the second top position amongst the international ship-breaking industry.
During its golden period, this industry had at its docks at Gadani 40 to 50 obsolete ships
at a time for breaking against few ships at present. High taxes, machinations of the
vested interests, high duty structure and increasing scrap ship prices have
contributed to the present state. These are the reasons most of the ship breakers are
not doing ship breaking as a permanent business or source of income rather as a
side business as and when a successful deal is possible. Level of operation is limited
to one light ship in a year or more than one or in certain cases, there is no ship
breaking activity at all.
India, Sri Lanka and Dubai have benefited the most from the decline in Pakistans ship-
breaking industry and have consequently emerged as a regional hub of ship-breaking.
Some measures adopted by the present government two years ago - in particular cut in
duties on import of ships for dismantling, had kindled hopes for the revival of this
industry, as it had started to attract entrepreneurs. The duties on ships doubled from five
to 10 per cent and sales tax increased from 15 per cent to 20 per cent, rendering the
business non-viable once again. The present relief package announced by the government
has, once again, rekindled hopes about the revival of this industry.
Pakistans ship-breaking industry is spread along the Gadani beach, which is about 50-
km north-west of Karachi. Ship-breaking had started there much before Pakistans
independence in August, 1947. However, the ship-breaking industry registered a
spectacular growth after Pakistans independence, enabling it to rapidly establish itself
into the club of top ship-breakers of the world by the mid-sixties.
Gadani is the third largest ship breaking yard and employs about 10,000 workers and
meets one-third of the scrap requirements of the re-rolling mills. A Gadani-based ship-
breaking firm scrapped the world's second-largest vessel The Sea Giant, a tanker of
555,051 dwt, in September 2003. It also scrapped the world's third-largest vessel, the
Kapetan Michalis in 2002.
In the eighties, the ship-breaking industry provided employment to over 35,000 workers
directly, while over 500,000 persons earned their living indirectly, through trade and such
industries that used ship scrap as raw material. In 1985-86, the ship-breaking industry
helped the country in making an annual saving of Rs. 1,500 million, which would
otherwise have been spent on import of iron and steel. It also earned another Rs500
million in foreign exchange through the export of surplus ship-scrap, second hand
machinery, generators, air-conditioners and other equipment. It also contributed to the
national exchequer, during that financial year, an amount of over Rs. 1,035 million in
customs duty, sales tax and income-tax. The ship-breaking industry paid Rs2.69 billion in
customs duty alone during the period J uly 1982 to J une 1986.
The provincial government of Balochistan earned an annual income of Rs. 22 million
through license fees and lease money during those times; while Gadani Town Committee
earned over Rs30 million every year, through octroi duty, making it Pakistans richest
local body, in terms of population-revenue ratio.
Prior to the independence, some casual businessmen used to occasionally break a few
obsolete ships at Gadani. However, it was after Pakistans independence that a group of
entrepreneurs made serious efforts to develop this casual trade into a regular industry. At
that time, Gadani beach lacked the necessary infrastructure facilities like carpeted roads
and utilities like electricity, potable water, telephone and even arrangements for
providing first aid or medical help to the workers.
The place was uninhabited and consequently there was an acute shortage of labor as well.
The majority of workers were uneducated, unskilled and migratory. Even the
businessmen, who entered the trade, possessed little know-how of the industry, but they
were infused with self-confidence and imagination and had realized that with the
introduction of modern bulk carriers and the looming crisis in the international shipping
industry, most of the outdated/obsolete vessels would soon become redundant. Besides,
as a result of initiation by many countries of a process of replacement of their
unserviceable WWII vintage war ships with modern and sophisticated vessels, there
appeared an international market for the sale of obsolete ships.
A number of other factors also contributed to the rapid growth of the ship-breaking
industry in Pakistan. Among others, these included a growing demand for iron and steel
for the countrys rapidly developing re-rolling mills, engineering and other ancillary
industries, which consumed iron, steel as well as other non-ferrous metals.
The disruption of normal trade relations with India following 1965 and 1971 wars,
discontinuity in supply of steel and iron products from Pakistans only steel mill at
Chittagong after the emergence of Bangladesh and massive devaluation of rupee in 1972
made import of iron and steel products much costlier. This provided a chance to the ship-
breaking industry to meet the national demand for raw material from the much cheaper
ship-scrap.
Although the policy of nationalization, adopted by the government in 1972, discouraged
investment in fixed assets and capital goods, it gave a boost to the ship-breaking industry
which, being labor-intensive, needed neither fixed assets nor capital goods.
In 1978, realizing the importance of ship-breaking industry for the national economy,
Pakistan government announced a number of measures to give a boost to this industry.
These included: recognition of ship-breaking as an industry, declaring Gadani as a port,
reduction in customs duty on ships imported for breaking, provision of telephone
connections, increasing the lease period from one year to five years; and appointment of
an 8-member committee to solve other problems of the ship-breaking industry.
The years between 1969 and 1983 are considered to be the golden period of the ship-
breaking industry in Pakistan. It was during this period that the ship-breaking activities
witnessed a boom and this industry left many of its international rivals far behind as far
as the total number of ships demolished and the tonnage of ship-scrap handled was
concerned.
6 6 S SH HI IP P B BR RE EA AK KI IN NG G P PR RO OC CE ES SS S
The scrapping process follows a sequential pattern that can be described in a series of
four steps:
Offshore: Prior to beaching, tanks are discharged and valuables (mostly
electronic equipment) are removed
Inter-tidal zone: The vessel is beached by own power and dismantling is initiated
(in a certain sequence)
On the beach: Sorting of components and further cutting into manageable pieces
for further transport and processing
On shore/final destination: Re-use as is of different components/materials
(secondhand market) and re-manufacturing/recycling into new
products/components.
6 6. .1 1 A Ac cq qu ui is si it ti io on n / / B Bu uy yo ou ut t
Unserviceable vessels are sold on the basis of lightweight Tonnage (LDT) of the vessel.
A ship is measured mainly on the basis of its Dead Weight capacity. Dead weight of a
ship is defined as 'weight of cargo plus fuel and consumable stores' while light weight of
a vessel is the 'weight of the hull including, machinery and equipment'. The length,
breath, depth, and displacement are also very important factors for buying and selling of
an unserviceable ship. Present international rate for sale of vessel is US$ 400 to US$ 450
per lightweight tonnage (LDT), This is particularly in case of ships with better steel
quality, whereas the previously book able price was US$.150 per LDT.
Generally 95% of a ships body is made of mild steel (M.S.), 2% of stainless steel and
3% of miscellaneous metals, such as brass, aluminum, copper, gun metal and other alloys
which are important factors of ship breaking. Stores and other materials that may be
available from a ship purchased for beaching are also considered very important. In
fixing the price of a ship, consideration is given to the factor of whether it is a dead ship
or a running one. Ships store ranges from foodstuff to clothing, from electrical to
electronics, machinery of most type, life saving equipment, drugs, communication
equipment etc.
The Pakistan Ship Breakers Association purchase dead/unserviceable vessels or ships in
running conditions from different parties at different points and bring those to Pakistani
Coast for beaching. The ship breakers purchase the vessels of their choice. Nationality of
the owners of the vessels or the country of origin of the ships is not a factor of
consideration but they take into account the following points during purchase of the
ships:
Light weight tonnage of the vessels (LDT)
Cost of the voyage to the beaching site of the ship.
Probable towing cost in the case of dead vessel.
General stores that may be available.
Miscellaneous materials that may be available.
Position of the re-useable marine stores.
From various sources, such as the Ship Breakers Association, ship breaking enterprises
and the Govt. agencies, it is gathered that generally the following three types of vessels
are demolished in Pakistani Ship Breaking Yards.
General cargo vessels
Tankers
Bulk carriers
Pakistani breakers prefer to demolish the above types of vessels for reasons, such as
availability of profitable items, safe and easy breaking operation and safe journey of the
vessels to beaching site. The main sources for purchase of unserviceable vessels are the
former USSR, Bulgaria, Romania, Greece, Italy, Turkey, J apan, Singapore, South Korea,
etc. Towing of a dead ship for scrapping is costly, so the Pakistani ship breakers and their
agents generally prefer to buy ships on voyage or ships stranded at a port near to coast,
i.e., .located at any port of India, Bangladesh, Sri Lanka, Myanmar, Thailand or
Singapore.
6 6. .2 2 B Be ea ac ch hi in ng g
When a ship is towed from the sea to the beaching ground, it is inspected, checked and
made gas free. Then, fitters start opening the important parts and removable items from
the vessel. These include furniture, beds, bunks, cabin materials, utensils, crockery,
removable electrical items, electronic appliances, sanitary wares, insulators, food items
and cosmetics, glass ware, refrigerators and pipes & fittings, as these may be damaged
during beaching operation of the vessel.
6 6. .3 3 D Di is sm ma an nt tl li in ng g
No sound technical system is used to recover valuable stores, spares, metals and other
items from the ships. On arrival of ships at outer anchor of the Karachi Port, agents of
shipping companies book a towing vessel from the Karachi Port Authority for towing the
vessel to the shore / Gadani. The Port officials before towing the vessel verify the import
documents, document on payment of duties/ taxes and certificates issued by the
concerned Government authorities. One Deck Officer and one Certified Engineer, in
addition to the Master of the vessel need to be present during beaching operation of a
ship. Then Pakistan Navy comes for inspection of the ships and prepares a complete
inventory of communication equipment, radios, wireless sets, walkie-talkies, transceivers,
engines etc.
As per law of the land, the walkie-talkies and wireless sets are subject to be handed over
to the Wireless Board of the Government immediately after completion of beaching of
the ships. Meanwhile, the Mercantile Marine Department conducts surveys to check the
safety measures taken and also checks the marine stores and a list is prepared. The
Mercantile Marine Department surveyors also verify all the documents of the vessels.
First of all, valuable metal furniture, fixtures, electrical and electronic items, engines,
boilers etc. are removed from the vessel. Then the ships if filled up with water up to deck
level and later the water is discharged through the sea corks or through other means to
clean the ships and make the vessels ready for scrapping. This cleaning process is not
sufficient to make the vessel free from dangerous gases, fumes, chemicals and
contaminants. The water so discharged, contain a mixture of hazardous chemicals and
contaminants. Thus, sea-water is contaminated which causes harmful effects to sea lives
and also pollutes the environment. Risks of the asbestosis, chemicals, hydrocarbons, toxic
items and radiation remain there all the time.
6 6. .3 3. .1 1 M Ma at te er ri ia al l C Co om mp pl le ex xi it ty y
To enable assessments of waste streams and quantities from the dismantling process, the
vessel is usually segmented into spaces:
Cargo spaces
Machinery spaces
Accommodation spaces
The composition of these spaces in terms of complexity/ density of components and
material composition vary significantly. This approach allows simple breakdown as
function of material composition complexity and allows waste stream quantification to be
undertaken.
The cargo space areas represent large low density volumes of the vessels bounded
by ships structure and containing mostly only simple items such as pipe work and
outfit steel includingladders and hatch covers. There may also be limited amounts
of cabling, instrumentation andselected machinery items.
The machinery space areas represent steel structure surrounding high-density
areas comprising predominantly heavy machinery items including the main
engines, generators, auxiliary machinery and pipe work. There will also be
significant electrical cabling, electronic equipment, instrumentation, insulation
and outfit steel in such areas. Overall, a far greater diversity of original materials
will be present than in cargo, tank or void spaces.
The accommodation space areas however whilst also high-density areas
surrounded by (generally lighter scantling) steel structure have a marked
difference in the composition comprising hotel outfit (furniture, furnishings,
sanitary) within joinery sub-divided areas, together with electrical and electronic
equipment and controls in the navigation and domestic areas. These areas require
high levels and complex utility provision involving pipe work, electrical cabling,
ventilation trunking and comfort insulation.
Different ship types will have different mixes of these three area types and further, the
composition within the areas will differ accordingly. The total lightweight of the vessel
can be considered to comprise:
Lightship = A (Steelwork/ Outfit) + B (Machinery/ Outfit) + C (Joinery/ Outfit)
Different ratios by weight for different vessel types are presented in the following table.
This can be usedas a basis for calculating an illustrative average composition reflecting
the mix of ship types inthe fleet.
Ship Type Lightship Tons A (%) B+C (%)
Cargo ship 400,000 dwt 53,500 85% 15%
Cargo ship 200,000 dwt 29,400 84% 16%
Cargo ship 100,000 dwt 18,300 80% 20%
Cargo ship 70,000 dwt 16,700 77% 23%
Cargo ship 20,000 dwt 08,300 69% 31%
Cruise vessel 2,000 pax 23,000 44% 56%
Pass/RoRo ferry 00,985 59% 41%
Fishing Vessel 01,416 30% 70%
Offshore Supply 00,765 51% 49%
Dredger 02,379 63% 37%
Average Fleet Vessel 100% 75% 25%
An average ship can be identified based upon the composition of the world fleet into
these different ship types and a weighted average calculation for the relative weight
breakdown. Theabove calculation has defined this average vessel composition by weight
as: Lightship =(75% A) +(12.5% B outfit) +(12.5% C outfit)
6 6. .4 4 S Sc cr ra ap pp pi in ng g
During the second phase, cutters and their helpers start cutting the vessel into parts. The
breaking operation is undertaken based on the structural design of the vessel. The larger
parts are dragged to the dry part of the shore with the help of motorized pulley
(Winches). A large number of workers are also engaged in this operation. Though the
motor does the main job, workers need to help the pulley driver in dragging the part to
the dry area of the shore.
Another group of cutters, helpers and workers start cutting the dragged parts of the ship
into truckable (transported by trucks) parts as per order of the purchasers. Heavy
equipment like boilers, motors, etc. are carried to stack yards by moving crane.
The unskilled workers carry metal plates, metal bars or pipes on their heads or shoulders,
start walking in synchronized steps up to a definite destination and then pile up metal
plates in stacks yards or load themon trucks. The supervisors control the group of
workers; the on-looker guides them and helps them in pilling up the heavy metal plates in
stack or loading on truck.
6 6. .5 5 P Pr ro od du uc ct t M Mi ix x O Of ff fe er re ed d
Subject to the maximum aggregated wastage up to seven per cent, the following are the
normal percentage or proportion of scrap and other products obtained from the breaking
of oil tankers, bulkers, cargo ships, drilling ships, war ships, passenger ships and cattle
carriers, namely:-
Item Proportion (%)
Ship plate and profiles of thickness and above 40%
Ship plate and profiles of 3/8 thickness and above but below 20%
Second quality re-rollable scrap of short lengths 15%
Small irregular pieces and re-meltable scrap 15%
Cast iron, pipes or cast steel 7.5%
Non-ferrous metals 0.5%
Stores or machinery 2.0%;
Most of the ship breakers already have vendors / third party agents in contract for buying
the various extracted scrap in bulks. Usually agents are appointed by large companies for
buying scrap from ship breakers.
Pakistan is not self sufficient in iron; as such, it has to depend on the scrapped iron to
feed the rolling mills and steel factories. Other items of the ship such as engines,
generators, boilers, electrical items, furniture, plumbing items, refrigerators, air-
conditioners, etc. have a good market in Pakistan, especially after being refurbished /
serviced. The main users of scrapped irons are the local steel re-rolling mills producing
MS rods, MS bars, angles and steel sheets for domestic market. The engines and
generators are used by the garment manufacturing factories; boilers are used mainly in
rice mills, garments washing plants, knitting plants and other industries. There is a great
demand for the wooden planks/bars and furniture which are sold on the markets located
throughout the country especially in Karachi.
6 6. .6 6 P Pr ro ob bl le em ms s i in n S Sh hi ip p B Br re ea ak ki in ng g & & H Ha az za ar rd ds s
6 6. .6 6. .1 1 N No on n C Co om mp pl li ia an nc ce e
In Pakistan, ship breaking is carried out in an open space. As a matter of fact, provisions
of the Factories Act and occupational safety measures with regard to doors, windows,
stairs etc. of a factory premises are not taken into consideration. No young person or
women are engaged in ship breaking yards. Limited amount of electricity is used for ship
breaking activities. Testing system of cranes, lifting machinery and motorized pulley is
hardly done. The yards re-use ropes and chains recovered from the broken ships without
testing and examining their strength. There is no marking system of loading capacity of
the chains of cranes and other lifting machineries. Gas cutters and their helpers are
cutting the steel plates almost round the clock without protection of eyes, so their eyes are
always vulnerable to welding effects. They do not wear any uniform and generally never
use hand gloves and boots. The unskilled workers carry truckable pieces of iron sheets on
their shoulders and they do not know the weight of the sheets they carry and the
employers are also not aware of the legal limit of weights carried by workers. Usually,
these workers carry weights far above the limit prescribed in the Factories Act and
Factories Rules.
6 6. .6 6. .2 2 L La ac ck k o of f H Ha az za ar rd d C Co on nt tr ro ol l
Ships are not properly cleaned before beaching. Generally, an eyewash test is carried out
to certify that a ship is free from dangerous chemical and fumes. Workers enter into such
areas without taking any precautionary measure or without wearing masks or aprons.
Workers are not aware of hazards to which they are likely to be exposed. Consequently,
workers suffer from suffocative injury and lung problems, which causes temporary loss
of working capacity. The hatches and pockets of vessel may contain explosive or
inflammable gases. The cutters, if they understand from their experience, drill small holes
in order to release gases or fumes. These types of crude attempts very often cause severe
explosions.
Ship breaking is a hazardous occupation and entails life risk due to accident and fatal
occupational diseases, as the employers do not provide any proper protective and
precautionary gears. It is found that the beaches where ship breaking is undertaken are
full of chemicals and toxic substances, small pieces of pointed and sharp iron splinters
pasted on the surface of the beach causing injuries; the workers usually work bare footed
and without masks. Occupational health and safety is not important to the employers,
they hardly maintain a First-aid Box. Most of the workers are illiterate, very poor and are
not conscious about their health, safety and the dangerous effects of the poisonous
chemicals. Accidents are not reported or recorded. If any worker is affected by
occupational diseases, he is no more employed by any of the employers. The employers
through adoption of various unfair practices usually conceal information when any
worker dies due to occupational accidents. In most cases, families of the victims are not
informed, as contractors do not use proper names and addresses of the workers and there
is no monitoring or inspection by the Inspection Department and the Labor Department.
Following are some of the problems associated with Ship Breaking Activities that have
roused national and international attention (especially IMO, Greenpeace, ILO, UNIDO
etc.)
Pollution: Ships contain a lot of toxic substances and other hazardous materials.
The vessels are broken on Asian beaches and along rivers. The toxic substances
are released into the environment. The soil, the sea and the rivers are heavily
polluted.
Deadly Industry: Workers dismantle the ships with their bare hands. Many are
injured or killed by suffocation or explosions. Many are expected to contract
cancer due to asbestos dust. The ship breaking industry is one of the most deadly
in the world.
Ballast Water: Ships for scrap arrive most of the time 'in ballast'. The ballast
water is intentionally brought on board in order to adjust the ships' stability. The
ballast water from ships-for-scrap pollutes the coastal area with oil, biocides and
heavy metals. Discharge of ballast water threatens the ecological balance by
introducing marine organisms from other areas of the world.
Contamination: Ship breaking activities pollute the soil, sea and rivers. Local
fishing and agriculture as a livelihood are almost impossible. Samples taken from
Asian yards show contamination with high levels of mineral oil and toxic
substances. According to western standards enough to warrant clean-up actions.
Permanent Danger: Hundreds of people at the ship breaking yards endure hard
physical labor. They work in permanent danger. Steel plates and pieces fall off the
ships. On board gasses cause fires and explosions. Many workers are injured or
even killed by the physical hazards. Main causes of death are fire/explosion, hit
by materials falling, falls, suffocation and inhaling Carbon Dioxide (CO2).
Toxic Fumes: The ship breaking workers are permanently exposed to toxic
substances. They breathe toxic fumes and asbestos dust. Not only on the job, but
also in the sleeping quarters nearby. One out of four workers is expected to
contract cancer due to workplace poisons. This makes the industry amongst the
most deadly in the world.
6 6. .7 7 G Gu ui id de el li in ne es s & & P Pr re ev ve en nt ti io on n
In November 2002 the ILO decided to revise, review and adopt 'Guidelines on
safety and health in ship breaking'. The guidelines are a must for every existing
and potential ship breaker to adhere to since due to global awareness many
international organizations like IMO tend to discourage selling of ships for
scrapping to countries where Health Safety and Environment (HSE) guidelines
are not followed.
The International Maritime Organizations (IMO) is the United Nations body that
regulates the shipping industry. Established to improve the safety at sea and
prevent marine pollution. In March 2002 it started to debate its role in ship
breaking.
The Basel Convention, under the United Nations Environmental Program (UNEP)
regulates the international trade in hazardous waste. It recently accepted
guidelines on environmentally sound management of full and partial dismantling
of ships.
There are various other guidelines that ship breakers are expected to adhere to prevent
any hazard and also not to rouse attention of Human Right Organizations that might
cause severe legal and financial implications to the business.
6 6. .8 8 M Ma ac ch hi in ne er ry y & & E Eq qu ui ip pm me en nt t
The production equipment required for the yard is concentrated in two particular areas;
steel cutting and materials handling. These two activities dominate the ship dismantling
operation as defined.
For steel cutting, high energy plasma processes are used for all large scale plate cutting
activities wherever possible with secondary cutting undertaken by either conventional
oxy/fuel torches or via more specialized processes such as oxygen arc or powder cutting.
A high degree of process mechanization is considered to be essential. Such
mechanization would need to be specially developed to suit ship dismantling activities.
For reducing the steel down to acceptably small pieces for reprocessing, a large
proportion of cutting is performed by large, heavy duty, mechanical shear mounted on the
booms of tracked excavators. Such shear/excavator combinations are extensively used
during the dismantling of large, land based, steel structures such as power stations.
Most of the movements of large panel type structures from the areas adjacent to the dock
to subsequent breakdown external areas and in the workshops will be done with self
elevating transporters similar to the type common in modern shipyards. A number of
these vehicles of varying capacities will be required to meet the large number of load
movements required. It is anticipated that these will operate independently of the main
facility craneage by deploying stools from which to place and recover loads.
7 7 L LA AN ND D & & B BU UI IL LD DI IN NG G R RE EQ QU UI IR RE EM ME EN NT T
7 7. .1 1 M Mo od de el l S Sh hi ip p B Br re ea ak ki in ng g Y Ya ar rd d
Gaddani is considered to be the dedicated site for ship breaking in Pakistan. Plots are
available at Gaddani in prescribed sizes. A ship breaking plot includes 280 feet sea shore
area (Sea Shore (Beaching Facility)) with 4 acre land. These plots are either the property
of local land lords or BDA. The interested party generally surveys the site (plot and sea
depth at that point). The party then contacts the respective authority or the person and
makes a deal. The interested party is required to pay a one time lump sum amount
depending on various factors i.e. site geographic location, sea depth etc. However, the
amount may vary - starting from 1 million to any upper limit depending on how many
plots are required. Generally for one plot it is from 1 million to 2 million rupees.
Whereas, an additional amount ranging from Rs. 100,000/- to Rs. 160,000/- is also
charged in account of annual rent per plot.
For the purpose of this pre-feasibility report, one plot has been proposed at Gaddani. The
total area of the plot would be of four acre with around 280 feet wet birth. A typical
dismantling yard comprises the following key functionality:
Sea Shore (Beaching Facility), used to moor vessels alongside upon arrival at the
yard prior to the start of the dismantling activities allowing general preparations to
be undertaken;
o Clearing of all residual materials at a cleaning/ waste reception station
(incl. clearance of e.g. any cargo in tanks or holds, bunker and fuel tank,
contents, all bilge and oily water, sewage tank contents, ballast water and
sediments, etc.)
o Vessel is made gas free and certified
o Ensure that ship is presented for dismantling in a clean and safe condition
The primary dismantling facility, or facilities, which take the ship out of the
water, isolate it from the marine environment and allows the initial vessel
breakdown into large blocks or sections.
Large capacity cranes allowing these large sections to be removed from the
primary dismantling facility
Workstations for secondary dismantling activities and sequential breakdown into
component elements. Special enclosed workstations would be required to provide
containment during the removal of hazardous and toxic materials.
External storage areas which hold benign steelwork and materials between
different stages of dismantling.
Secure, and open, storage that holds fully processed equipment and materials
ready for output from the facility for recycling re-use or disposal.
7 7. .2 2 A Ar re ea a R Re eq qu ui ir re em me en nt t
The type of primary facility (ship lift or dock) to be provided will be dependent upon a
number of factors:
The size range of ships to be accommodated
The product mix of ships to be processed
The prevailing site topography and ground conditions
The annual throughput of ships to be deconstructed
Eventual layout adopted for any individual yard will also be largely dictated by these
same factors. The size assumed for this pre-feasibility would be in the range of 1000-
5000 LDT; and one aforementioned plot would be sufficient to handle such a ship. This
assumption is based on our discussions with the existing ship breakers, however, if a ship
breaker is willing to enhance the capacity of ship handling, he can add the another plot.
It is also suggested to undertake all necessary measures for pollution traps to ensure that
any solid or liquid contaminants which may be spilt cannot find their way into local
waterways or permeate into the water table.
7 7. .3 3 D De es sc cr ri ip pt ti io on n o of f M Mo od de el l F Fa ac ci il li it ty y
The facility described in outline here is configured for the routine dismantling of small
and medium sized, steel intensive vessels which collectively display a high degree of
conformity in their structural design configuration.
It is considered that the facility needs a minimum site area of 20 hectares offering an
absolute minimum of 280 feet of water frontage adjacent to deep water access. A 400
meter long and 15 meter wide finger jetty is provided to accept incoming vessels and
where initial dismantling activities commence with the removal of as much outfit items
and materials as possible prior to entering the dry dock. The jetty operates a 40 tonne
capacity traveling jib crane to furnish the large number of smaller lifts envisaged at this
stage of the dismantling operation. On the jetty initial Cleaning/ Waste reception facilities
for relevant cleaning operations (gas free, etc.) and waste categories (domestic waste,
consumables, operational waste, cargo remains, etc) are suggested to install.
The dock head area is used mainly for complex shaped steel work such as bow and stern
sections as well as accommodation quarters. These areas are also provided with bunds to
contain spills and prevent contamination of the adjacent ground.
A further large external hard-standing area is provided where the relatively large panels,
output from the areas adjacent to the dock, are reduced down to the sizes which command
the maximum scrap or re-use values. Materials handling activities in this area are
predominantly undertaken with a mobile crane and lifters (as the size of ship assumed is
small).
Since the electricity is not available at Gaddani, the breaking activity on ship would
specifically be performed in day light, where, steel plate cutting on open external area
could be undertaken in late hours. However, ship breaking activity at Gaddani is noted to
be of 8 to 12 hours job. A covered area is also proposed to be used as workshop on site in
which the small dismantling of steelwork, piping and equipment which is
environmentally hostile or is valuable or easily damaged is undertaken.
Generally, at Gaddani the produced scrap is stacked in the open area and later on
transported to the re-rolling mills. Scrap loading activity is undertaken using fork lift
trucks.
8 8 F FI IN NA AN NC CI IA AL LA AN NA AL LY YS SI IS S A AN ND D A AS SS SU UM MP PT TI IO ON NS S
Ship Breaking in Pakistan is no longer remained an attractive business for most of the
existing players. This is due to the following reasons:
Phenomenal increase in scrap ship prices (increased from $150 to $450 per LDT
although light ships are available in lower prices).
Un-competitive government levies on the industry compared with those in the
neighboring countries.
Low duty structure on Steel Billets.
Keeping in mind the above three factors, it would be difficult for a new entrepreneur to
survive in the market, however, as the scrap ship prices become normal in the
international markets, ship breaking business could become an attractive opportunity for
the businessmen. With this underlying scenario, the following assumptions have been
made to develop the financial model for the proposed pre-feasibility.
Due to the high market prices of the scrap ships and the above mentioned reasons, a
light ship has been assumed to be scraped on quarterly basis (four ships to be
scrapped in a year).
After the discussions with the existing ship breakers, it was observed that it takes
two to three months (depending on the number of deployed staff) to completely
dismantle a ship of 3000-8000 LDT (light dead weight tonnage) and sell its scrap;
therefore, a long term financing (for the period of 5 or more years) would be
incompatible with the typical business cycle of ship breaking business.
Due to the above reason, Ship breaking business is considered to be a short term
financing business; therefore financial statements for one year has been prepared. In
consistent with the earlier assumption of scraping one ship in a quarter and four
ships in a year, financial statements presents the projected accounts on a quarterly
basis.
For each quarter one small ship of 3000 LDT has been assumed, which will be
scrapped and sold off in three months and for the next quarter a new ship of the
same size (on average) has been taken.
The detailed project cost estimates for the proposed Ship breaking and Scrapping
Business have been formulated under the above assumption. The projections cover the
cost of land, machinery and equipment including office equipment, fixtures etc.
Assumptions regarding machinery have been provided. The specific assumptions relating
to individual cost components are given as under:
8 8. .1 1 O Ov ve er ra al ll l S Sh hi ip p B Br re ea ak ki in ng g S Si it te e & & O Of ff fi ic ce e R Re en no ov va at ti io on n - - C Co on ns st tr ru uc ct ti io on n C Co os st t
Gaddani Ship Breaking site is the prime location for the ship breaking business and ship
beaching plots (Sea Shore, Beaching Facility) are identified (by the government) &
available in the sizes of around four acre land providing 280 feet beaching facility. One
such plot can handle a ship with the weight of 1000 LDT to 5000 LDT. A new
entrepreneur may acquire a developed or undeveloped facility. However, for the purpose
of this pre-feasibility we have taken the following assumptions:
Requirement for Proposed Project - Ship Dismantling and Finished Scrap Storage
LAND PROCUREMENT COST
Plots Available in Size 4 Acre
Ship Beaching Facility (Sea Shore) 280 Feet
Monthly Rent/plot 12,000 /month
One time cost of Plot Procurement assumed 1,500,000
LAND & SITE DEVELOPMENT COST
Size/Capacity
(in Feet)
Cost/unit
(in Rs.)
Total
Cost
Dry dock & dockside areas -Land alignment
cost
280 700.00 196,000
Workshop Construction cost 1,000 400 400,000
Open dismantling area - Land alignment - - -
Underground gas pipe lining from gas tank to
the dismantling area
20 15000 300,000
Other construction cost i.e. winches base
construction etc.
4 50,000 200,000
Low cost residential arrangements for site
staff
4-5 10X10
Rooms
25,000 100,000
Provision for Office Renovation 200,000
Total cost of Ship Breaking Facility and other civil works 2,896,000
8 8. .2 2 U Ut ti il li it ti ie es s R Re eq qu ui ir re em me en nt t
The ship breaking (cutting) operations will be undertaken using liquid oxygen and LPG
gas; this would draw considerable amount of gas, while, cranes would require fuel for
which diesel will be used. The cost of the utilities including diesel/fuel, telephone, and
water is estimated to be around Rs. 1,025,000/- per quarter.
8 8. .3 3 H Hu um ma an n R Re es so ou ur rc ce e R Re eq qu ui ir re em me en nt t
In Ship breaking business, employers employ two major categories of employees and
workers. They are:
regular employees and workers;
casual or contractual workers supplied by the Labor Supply Contractors
The second category includes Semi skilled & unskilled workers like:
Truck helpers
Semi skilled gas cutters
Semi skilled Fitters
Lifters
Loaders
Wire pullers
Cutter, loading & wire pulling helpers.
The second category of workers is mostly engaged through Labor Supply Contractors,
and paid on a daily rate basis. Service records of all types of workers under the first
category should be maintained by the employers, while records of the workers supplied
by the Labor Supply Contractors are not maintained by the employers. Casual workers
work under the contractors supervision.
Ship breaking is a regular production process but not in conformity to normal
manufacturing processes. The number of workers engaged in the ship breaking yards
depends on the availability of work, size of the ship to be scraped and market value.
The number of skilled workers and security guards remain static while the number of
semi- skilled and unskilled workers varies as per need. It is estimated that in twenty ship
breaking yards at Gadani approximately 2000 regular workers (skilled-clerical-
commercial and security personnel) are working on monthly wage basis; about 25,000
workers of semi and unskilled categories, work in the above-mentioned ship breaking
yards round the year, on a daily wage basis.
Workers even migrate from one yard to another when a yard owner changes the labor
contractors or the labor contractors change the yards. This normally happens when the
demand for workers increases. Yard owners even attract skilled hands from other yards
by offering better wages and service conditions. Mainly gas cutters are considered to be
the most valuable workers in ship breaking enterprises. The unskilled workers are
generally divided into groups of 25.
The following table gives the details of the human resource requirement for the proposed
setup:
STAFF SALARIES AND EXPANSES
Technical Staff
Skilled Workers
No. of
Persons
Employment
Status
Monthly
Salary
Total
Monthly
Salary
Total
Annual
Salary
1. J amadar* (overall all supervision
of Breaking Operations)
1 Permanent 10,000 10,000 120,000
2. Foremen/Supervisors 1 Permanent 6,000 6,000 72,000
Technical Staff
Skilled Workers
No. of
Persons
Employment
Status
Monthly
Salary
Total
Monthly
Salary
Total
Annual
Salary
2. Fitters (he is engaged to
dismantle important parts, pipes,
hardware, metal etc. of the vessel).
1 Permanent 5,000 5,000 60,000
4. Gas cutters/Welders (highly
skilled)
2 Permanent 5,000 10,000 120,000
5. Crane operators 1 Permanent 6,000 6,000 72,000
6. Drivers 1 4,000 4,000 48,000
7. Rhythmic callers/singers. (He
goes on singing to synchronize
steps of the group of casual workers
while carrying heavy steel plates
and pipes etc. from one place to
another; their role is highly
important).
1 Permanent 3,000 3,000 36,000
Total salary - Technical staff 7 44,000 528,000
Semi Skilled Worker
1. Truck helpers 2 Contractual 3,000 6,000 72,000
2. Semi skilled gas cutters 3 Contractual 3,000 9,000 108,000
3. Semi skilled Fitters 3 Contractual 3,000 9,000 108,000
4. Lifters 2 Contractual 3,000 6,000 72,000
5. Loaders 3 Contractual 3,000 9,000 108,000
6. Wire pullers 1 Contractual 3,000 3,000 36,000
7. Cutter, loading & wire pulling
helpers.
2 Contractual 3,000 6,000 72,000
Total salary - Technical staff 16 48,000 288,000
General & Admini strative Staff
Admin. & Accounts Officer 1 Permanent 5,000 4,000 48,000
Secutiry Staff 1 Permanent 4,000 4,000 48,000
Total salary - Non technical staff 2 8,000 96,000
Overall Salary Expenses per
annum
25 52,000 912,000
*local termused for the Incharge of overall ship breaking operations who carries also skilled workers
The J amadar will also perform additional duty of staff security and environmental safety.

8 8. .4 4 S Sh hi ip p B Br re ea ak ki in ng g S Si it te e / / O Of ff fi ic ce e F Fu ur rn ni it tu ur re e & & E Eq qu ui ip pm me en nt t
A lump sum provision of Rs. 80,000 for procurement of office/ship breaking site
furniture is assumed. This would include table, desk, chairs, office stationery and
equipment. The breakup of Factory Office Furniture & Fixtures is as follows:
Item Number Total Cost
Table & Chair for Owner 1 5,000
Tables & Chairs for Admin. Staff 2 4,000
Waiting Chairs 3 3,000
Curtains & Interior Decoration for office - 4,000
Chairs for Workers/Labor 5 4000
Electrical Fittings & Lights - 20,000
Fax machine 1 10,000
Personal Computer 1 30,000
Total 80,000
8 8. .5 5 D De ep pr re ec ci ia at ti io on n T Tr re ea at tm me en nt t
The treatment of depreciation is assumed to be on a diminishing balance method at the
rate of 15%per annum on the following. The method is also expected to provide accurate
tax treatment.
1. Plant & machinery
2. Construction and Renovation
3. Vehicles
4. Furniture and Fixtures etc.
8 8. .6 6 U Ut ti il li it ti ie es s a an nd d O Ot th he er r E Ex xp pe en ns se es s
Assumptions for the utilities and other expenses have been estimated after the discussion
with the industry experts and stake holders. Per monthapproximate cost of utilities would
be as follows:
Utilities - Monthly expenses 150,000
Electricity -
Diesel/Fuel 22,500
Other Consumables 7,500
Gas ( used for oxygen arc) 289,500
Water 750
Telephone 1,500
Other expenses of the permanent staff deployed at breaking
site
20,000
Total 341,750
Transport and communication cost 15,000
Other Misc. Expenses 20,000
8 8. .7 7 W Wo or rk ki in ng g C Ca ap pi it ta al l R Re eq qu ui ir re em me en nt ts s
It is estimated that an additional amount of twenty four million (24 million) rupees will
be required as cash in hand to meet the working capital requirements. These provisions
have been estimated based on the following assumptions for the proposed business. The
detailed working capital assumptions are tabulated below:
Working Capital
Utilities - Three Months (Office & Ship breaking Yard)
1,025,250
1. Electricity - Not available at Gaddani -
2. Gas ( used for ship breaking) 868,500
3. Water/Month 2,250
4. Telephone/Month 4,500
5. Diesel/Fuel 67,500
6. Other Consumables 22,500
7. Other expenses of the permanent staff deployed at breaking site 60,000
Communication and Transportation Cost 45,000
One Year Advance Rent of Plot at Gaddani (@ Rs. 12,000 / month) 144,000
Salaries - Three Months (Permanent Staff) 156,000
Cash in hand at the beginning of the period 24,000,000
Raw Material Inventory - One light Ship of 3000 tonne (@ $300/tonne) 54,000,000
Total Working Capital 79,370,250
8 8. .8 8 M Ma ac ch hi in ne er ry y & & E Eq qu ui ip pm me en nt t
Machinery and Equipment expenses after the discussions with the existing ship breakers
have been assumed as follows:
Heavy Machinery Capacity
No.(s)
Required
Price/unit Total Cost
Cranes 40 ton 1 2,000,000 2,000,000
Lifter (amended dumpers with fork) 950 ton 2 2,100,000 4,200,000
Winches (For Ship/Material Pulling
from Sea) - 4 700,000 2,800,000
Other Machinery & Installation
Expanses - 1,000,000 1,000,000
Total Machinery 10,000,000
Other Equipment
Cutting Equipment (Gas Cutters) - 100,000 100,000
Liquid Oxygen Tank (Fon Gas -
capacity in cubic feet) 1500 1 500,000 500,000
LPG Tank (capacity in Liter) 1000 1 500,000 500,000
Heavy Machinery Capacity
No.(s)
Required
Price/unit Total Cost
Wires (in k.g.) - 200,000 200,000
Cuppi (Large) - 50,000 50,000
Shackles - 50,000 50,000
Other Equipment 100,000 100,000
Total Equipment 1,500,000
Total Machinery and Equipment 11,500,000
8 8. .9 9 9 9. .8 8 V Ve eh hi ic cl le e f fo or r S Su up pp po or rt t a an nd d M Ma ai in nt te en na an nc ce e S Se er rv vi ic ce es s
A light loading vehicle would be required for providing services for the maintenance,
communication of machinery spare parts, labor etc. For this purpose a transportation
vehicle has been proposed and an amount of Rs. 400,000 is assumed to be required to
purchase the vehicle.
8 8. .1 10 0 P Pr re el li im mi in na ar ry y E Ex xp pe en ns se es s
A lump sum provision of Rs. 50,000 is assumed to cover all preliminary expenses like
registration, documentation charges, etc. which has been amortized over the 4 quarters
(one year) period.
8 8. .1 11 1 I Im mp po or rt t D Du ut ty y o on n S Sc cr ra ap p S Sh hi ip ps s
Import Duty on Scrap Ship @ 24% of the import value of the scrap ship has been
assumed. This was found after the discussions with the industry experts.
8 8. .1 12 2 S Sh hi ip p A An nc ch ho or ri in ng g a an nd d T Tr ra an ns sp po or rt ta at ti io on n C Ch ha ar rg ge es s
It has been assumed that the ship would be purchased on FOB basis however, a provision
of $2000 per ship of 3000LDT has been assumed for this purpose.
8 8. .1 13 3 S Se el ll li in ng g & & D Di is st tr ri ib bu ut ti io on n E Ex xp pe en ns se es s
For the purpose of this pre-feasibility, it has been assumed that the ship breaking
operations would render in association with re-rolling mills and will appoint 2 to 3 of
themas booking agents. However, an amount equivalent to 1% of the cash sale for each
quarter has been assumed.
8 8. .1 14 4 G Ga as s ( (L Li iq qu ui id d O Ox xy yg ge en n a an nd d L LP PT T) ) I In nv ve en nt to or ry y
Gas (Liquid Oxygen and LPT) is the most important item used as fuel for welding and
ship breaking operations and a huge quantity is required to continue the operations
therefore an inventory sufficient for 3months operations has been assumed.
8 8. .1 15 5 F Fi in ni is sh he ed d G Go oo od ds s I In nv ve en nt to or ry y
The project will perform in association with the re-rolling mills; therefore all produce
will be supplied to the scrap processors (re-rolling mills and machinery buyers) on as and
when available basis. Therefore, no finished goods inventory has been assumed.
8 8. .1 16 6 R Re ev ve en nu ue e P Pr ro oj je ec ct ti io on ns s
The revenue streams of the operation have been determined through identifying those
material output streams for which a resale value is anticipated. The quarterly
volumes/values of material have been estimated based on the predicted scrapping
workloads. Unit resale values have been assumed based on each such revenue stream.
After the discussions with the existing business players, following revenue streams with
current market costs have been identified:
S.No. Component
%age of
total
Sales Price
in the local
market/Tonne
1 Ship plate and profiles of 1/2" Thickness and above 40% 29,000
2 Ship plate and profiles of 3/8" Thickness and above 20% 29,000
3 Second quality re-rollable scrap of short lengths 15% 27,000
4 Small irregular pieces and re-meltable scrap 15% 22,000
5 Cast iron, pipes or cast steel 8% 16,000
6 non-ferrous metals 1% 29,000
7 Stores or machinery 2% 29,000
Total 100%
Weighted average sales price of ship scrape assumed 26,675
The financial model has been developed for one year period (four quarters) therefore no
increase in sales price has been carried out.
8 8. .1 17 7 A Ac cc co ou un nt ts s R Re ec ce ei iv va ab bl le es s
Considering the industry norm, particular to the ship breaking and its allied industries
(i.e. steel re-rolling mills etc), it has been assumed that 15% of the sales will be on cash
basis. Whereas, remaining 85% sales will be on credit. A collection period of 30 days is
assumed for the credit sales.
All of the above assumptions are based on our findings during the discussions with the
industry experts and stakeholders. A provision for bad debts has been assumed for each
quarter which is equivalent to 0.5% of the credit sales.
8 8. .1 18 8 F Fi in na an nc ci ia al l C Ch ha ar rg ge es s
Based on the periodical nature of the ship breaking business operations, it is assumed that
short-term financing for one year will be obtained in order to finance the project
investment cost. This leasing facility would be required at a rate of 15% (including 1%
insurance premium) per annum. The installments are assumed to be paid at the end of
every quarter of the year.
8 8. .1 19 9 T Ta ax xa at ti io on n
The business is assumed to be run as partnership; therefore, tax rates applicable on the
income of partnership tax payer are used for income tax calculation of the business.
8 8. .2 20 0 C Co os st t o of f C Ca ap pi it ta al l
The cost of capital is explained in the following table:
Particulars Rate
Required return on equity 20%
Cost of finance 15%
Weighted Average Cost of Capital 17.5%
The weighted average cost of capital is based on the debt/equity ratio of 50:50.
8 8. .2 21 1 O Ow wn ne er r s s W Wi it th hd dr ra aw wa al l
It is assumed that the partners will draw funds from the business once the desired
profitability is reached from the start of operations. The amount would depend on
business sustainability and availability of funds for future growth.
9 9. . A AN NN NE EX XU UR RE ES S
9 9. .1 1 P Pr ro oj je ec ct te ed d I In nc co om me e S St ta at te em me en nt t
9 9. .2 2 P Pr ro oj je ec ct te ed d B Ba al la an nc ce e S Sh he ee et t
9 9. .3 3 P Pr ro oj je ec ct te ed d C Ca as sh h F Fl lo ow w S St ta at te em me en nt t
9 9. .4 4 S Su um mm ma ar ry y o of f K Ke ey y A As ss su um mp pt ti io on ns s
9 9. .5 5 C Co os st t a an nd d R Re ev ve en nu ue e S Sh he ee et t
9 9. .6 6 T Ty yp pi ic ca al l I In nf fo or rm ma at ti io on n d de em ma an nd de ed d b by y t th he e p pr ro os sp pe ec ct ti iv ve e s sh hi ip p b br re ea ak ke er r w wh hi il le e g go oi in ng g
f fo or r a a s sc cr ra ap p s sh hi ip p b bu uy yi in ng g d de ea al l
Sources of Information (documents, references)
Business information sources on Internet for prospective entrepreneurs:
http://www.shipbreaking.net/
http://www.steelchange.com/
SHIP BREAKING
PROJ ECTED INCOME STATEMENT
Projected Income Statement (Rs.)
Qtr. 1 Qtr. 2 Qtr. 3 Qtr. 4
Net (Adjusted Sales) 75,292,662 75,292,662 75,292,662 75,292,662
Cost of Sales 68,212,500 68,212,500 68,212,500 68,212,500
Raw Material - Scrap Ship 54,000,000 54,000,000 54,000,000 54,000,000
Gas - For cutting purposes 868,500 868,500 868,500 868,500
Import Duty and Taxes 12,960,000 12,960,000 12,960,000 12,960,000
Ship Anchorage & Transportation Expenses 120,000 120,000 120,000 120,000
Labor (Production Staff) 204,000 204,000 204,000 204,000
Other Misc. expenses 60,000 60,000 60,000 60,000
Gross Profit 7,080,162 7,080,162 7,080,162 7,080,162
Gross Profit Margin 9% 9% 9% 9%
General Administrative & Selling Expenses
Salaries 24,000 24,000 24,000 24,000
Rent Expense of Ship breaking site 36,000 36,000 36,000 36,000
Amortization of Preliminary Expenses 12,500 12,500 12,500 12,500
Depreciation Expense 501,600 482,790 464,685 447,260
Maintenance Expense - - - -
Other Utilities Expenses (Water, Telephone etc.) 96,750 96,750 96,750 96,750
Transport and communication cost 45,000 45,000 45,000 45,000
Steel Scrap Distribution and Transportation Expenses 113,421 113,421 113,421 113,421
Subtotal 829,271 810,461 792,356 774,931
Operating Income 6,250,891 6,269,701 6,287,806 6,305,232
Financial Charges (15% Per Annum) 1,630,001 1,207,139 768,221 312,637
Earnings Before Taxes 4,620,890 5,062,562 5,519,585 5,992,595
Tax 1,489,812 1,644,397 1,804,355 1,969,908
Net Profit 3,131,079 3,418,166 3,715,230 4,022,687
Monthly Profit After Tax 1,043,693 1,139,389 1,238,410 1,340,896
SHIP BREAKING
PROJ ECTED BALANCE SHEET
Projected Balance Sheet (Rs.) Qtr. 0 Qtr. 1 Qtr. 2 Qtr. 3 Qtr. 4
Assets
Current Assets
Cash & Bank Balance 24,357,750 16,966,399 9,420,463 1,714,569 47,843,122
Gas Inventoriy 868,500 868,500 868,500 868,500 868,500
Raw Material Inventory 54,000,000 54,000,000 54,000,000 54,000,000 0
Advance Rent for One Year 144,000 144,000 144,000 144,000 144,000
Accounts Receivable - 0 0 0 0
Total Current Assets 79,370,250 71,978,899 64,432,963 56,727,069 48,855,622
Fixed Assets
Machinery & Equipment 11,500,000 11,068,750 10,653,672 10,254,159 9,869,628
One time Cost of Land at Gaddani
Shipbreaking Site 1,500,000 1,500,000 1,500,000 1,500,000 1,500,000
Site Office Construction and Renovaiton 1,396,000 1,343,650 1,293,263 1,244,766 1,198,087
Furniture & Fixtures 80,000 77,000 74,113 71,333 68,658
Vehicle 400,000 385,000 370,563 356,666 343,291
Total Fixed Assets 14,876,000 14,374,400 13,891,610 13,426,925 12,979,665
Intangible Assets
Preliminary Expenses 50,000 37,500 25,000 12,500 0
Total Assets 94,296,250 86,390,799 78,349,573 70,166,494 61,835,287
Owner's Equity 47,148,125 50,379,204 53,897,369 57,712,600 61,835,287
Long Term Liability 47,148,125 36,011,595 24,452,204 12,453,894 0
Total Equity & Liabilities 94,296,250 86,390,799 78,349,573 70,166,494 61,835,287
BREAKING
PROJ ECTED STATEMENT OF CASH FLOWS
Projected Statement of Cash Flows (Rs.) Qtr. 0 Qtr. 1 Qtr. 2 Qtr. 3 Qtr. 4
Cash Flow From Operating Activities
Net Profit 0 3,131,079 3,418,166 3,715,230 4,022,687
Add: Depreciation Expense 0 501,600 482,790 464,685 447,260
Amortization Expense 0 12,500 12,500 12,500 12,500
(Increase) / decrease in Receivables - 0 0 0 0
(Increase) / decrease in RM - Scrap Ship - 0 0 0 54,000,000
(Increase) / decrease in Gas Inventory - 0 0 0 0
Net Cash Flow From Operations 0 3,645,179 3,913,456 4,192,416 58,482,447
Cash Flow From Financing Activities
Receipt of Long Term Debt 47,148,125
Repayment of Long Term Debt 11,136,530- 11,559,392- 11,998,310- 12,453,894-
Owner's Equity 47,148,125 100,000 100,000 100,000 100,000
Net Cash Flow From Financing Activities 94,296,250 11,036,530- 11,459,392- 11,898,310- 12,353,894-
Cash Flow From Investing Activities
Capital Expenditure 14,876,000
Machinery & Equipment 11,500,000-
Vehicle for support services 400,000-
Plot at Gaddani Site - One time cost 1,500,000-
Factory/Office Furniture 80,000-
Ship Breaking Facility and Office Construction & Renovation Cost 1,396,000-
Advance Rent of Ship Breaking Facility - One Year 144,000-
Gas Inventory for Ship Breaking 868,500-
Raw Material Inventory (One ship of 3000 tonne) 54,000,000-
Preliminary Expenses - Documentation and Registration 50,000-
Net Cash Flow From Investing Activities 69,938,500- 0 0 0 0
NET CASH FLOW 24,357,750 7,391,351- 7,545,936- 7,705,894- 46,128,552
Cash at the Beginning of the Period 0 24,357,750 16,966,399 9,420,463 1,714,569
Cash at the End of the Period 24,357,750 16,966,399 9,420,463 1,714,569 47,843,122
SHIP BREAKING
REVENUE ESTIMATION
Type and category of Ship assumed to be purchased: Small Size Cargo Vessel
No. of ships assumed to be purchased for Breaking & Scrapping: 4/year
Average Weight assumed for one Light Ship 3,000 LDT
Saleable Scrape after dismantling of ship assumed - in %age 93%
Total Wastage 7%
Saleable Scrape after dismantling of 4 ships - in tons 11,339 **tonnes
Distribution of saleable components*
S.No. Component %age of total
Sales Price
in the local
market
1Ship plate and profiles of 1/2" Thickness and above 40% 29,000 /tonne
2Ship plate and profiles of 3/8" Thickness and above 20% 29,000 /tonne
3Second quality re-rollable scrap of short lengths 15% 27,000 /tonne
4Small irregular pieces and re-meltable scrap 15% 22,000 /tonne
5Cast iron, pipes or cast steel 8% 16,000 /tonne
6non-ferous metals 1% 29,000 /tonne
7Stores or machinery 2% 29,000 /tonne
Total 100%
Weighted average sales price of ship scrap assumed 26,675 /tonne
Total Annual sales REVENUE 302,456,088
Revenue Esti mation on Quarter Basis
4
Qtr. 1 75,614,022
Qtr. 2 75,614,022
Qtr. 3 75,614,022
Qtr. 4 75,614,022
Cost Estimation
Raw Material Cost
1 USD=60 Pk. Rs.
Breakable Ship Value in the international
market $ 300 18,000 Rs. /tonne
Weight assumed for Light Ship (in tonnes): 12,000 Tonne
Value of the ship based on international market (excluding transportation
expenses) 216,000,000 Rs.
Total Anchorage & Transportation Expenses (4
ships) $ 8,000 480,000
Total Raw Material Cost 216,000,000
Raw Material Cost on Quart er Basi s
Qtr. 1 54,000,000
Qtr. 2 54,000,000
Qtr. 3 54,000,000
Qtr. 4 54,000,000
Ship Cutting & Breaking Cost (Gas
Consumption)
Gas Consumpti on/
tonne of cutting &
breaki ng
Cost per liter/
cubic feet
Total Cost of Gas
Consumed
Liquid Oxygen (in cubic feet) 6.5 33 2,574,000
LPG (in liter) 3 25 900,000
Total Cost of Gas Consumed in producing 12000 tonnes 3,474,000
Gas Consumpti on Cost on Quart er Basis
Qtr. 1 868,500
Qtr. 2 868,500
Qtr. 3 868,500
Qtr. 4 868,500
Total Annual COST of Raw Material & Gas used for 4 ships
breaking 219,474,000
*1000 LDT=Light Displacement Tonnage=1016 matric tonne
**MT=1.016= 1
SHIP BREAKING
SUMMARY OF KEY ASSUMPTIONS
CAPITAL EXPENDITURE
PARTICULARS
TOTAL
COST/DETAILS
Fixed Capital
Machinery & Equipment 11,500,000
Cranes 2,000,000
Lifter (amended dumpers with fork) 4,200,000
Winches (For Ship/Material Pulling from Sea) 2,800,000
Other Machinery & Installation Expanses 1,000,000
Cutting Equipment (Gas Cutters) 100,000
Liquid Oxygen Tank (Fon Gas - capacity in cubic feet) 500,000
LPG Tank (capacity in Liter) 500,000
Wires (in k.g.) 200,000
Cuppi (Large) 50,000
Shackles 50,000
Other Equipment 100,000
Vehicle for support and maintenance services - One light vehicle 400,000
Land Cost (280 Feet Sea Shore (Beaching Facility) with 4 acre plot at Gaddani) 1,500,000
LAND & SITE DEVELOPMENT COST 1,196,000
Provision for Office Renovation 200,000
Office Furniture and equipment 80,000
Preliminary Expenses - Documentation and Registeration 50,000
Total Fixed Capital 14,926,000
Working Capital
Uti lities - Three Months (Office & Shipbreaking Yard)
1,025,250
1. Electricity - Not available at Gaddani -
2. Gas ( used for ship breaking) 868,500
3. Water/Month 2,250
4. Telephone/Month 4,500
5. Diesel/Fuel 67,500
6. Other Consumables 22,500
7. Other expenses of the permanent staff deployed at breaking site 60,000
Communication and Transportation Cost 45,000
One Year Advance Rent of Plot at Gaddani (@ Rs. 12,000/month) 144,000
Salaries - Three Months (Permanent Staff) 156,000
Cash in hand at the beginning of the period 24,000,000
Raw Material Inventory - One light Ship of 3000 tonne (@ $300/tonne) 54,000,000
Total Working Capital 79,370,250
TOTAL PROJECT COST 94,296,250
Loan Finance 47,148,125
Equity Financing 47,148,125
Debt:Equity Ratio (50:50) 50%
PROJECT RETURNS AND OTHER FINANCIAL ASSUMPTIONS
IRR -
NPV -
ROI
30%
Payback Period
Debt Equity Ratio 50:50'
Required return on equity
20%
Cost of finance
15%
Weighted Average Cost of capital
Uti lities - mont hly expenses
150,000
Electricity
-
Diesel/Fuel
22,500
Other Consumables
7,500
Gas ( used for oxygen arc)
289,500
Water
750
Telephone
1,500
Other expenses of the permanent staff deployed at breaking site
20,000
Total Uti lities and other expenses - monthl y expenses
341,750
Transport and communication cost
15,000
Other Misc. Expenses/month
20,000
Annual increase in Other Misc. Expenses/month
Anchorage & Transportation Expenses
$ 2,000
Annual Increase in anchorage & transportation expenses
Import Duty and Taxes
24%
Operational Days / Month
30
Operational Days / Year
360
Sales on Credit - as %age of total
85%
Sales on Cash - as %age of total
15%
Accounts Receivable period (days) - only for 15% credit sales
1
Provision for bed debts (on credit sales)
0.5%
Inventory days / months(Gas 3 Month)
3
Finished Goods Inventory (Days)
No
Time taken to dismentle a 3000 tonne ship
90
Maintenance expenses
Steel scrap distribution and transportation expenses 1%
A An nn ne ex xu ur re e 9 9. .6 6
T Ty yp pi ic ca al l I In nf fo or rm ma at ti io on n g ge en ne er ra al ll ly y d de em ma an nd de ed d b by y t th he e p pr ro os sp pe ec ct ti iv ve e s sh hi ip p b br re ea ak ke er r w wh hi il le e
g go oi in ng g f fo or r a a s sc cr ra ap p s sh hi ip p b bu uy yi in ng g d de ea al l
Kindly inform us the full detail information as follow:-
1. Vessel Name and Type
2. Light Displacement (LDT) In Metric Ton or Long Ton
3. Place & Year Built
4. Length Overall X Breadth X Depth
5. Draft of The Vessel (FWD/AFT)
6. GRT/NRT
7. Number/Type/Capacity/Description Of:
Main Engine
Auxiliary Engine
Generators and Power of Generators In KW
Auxiliary Generators and Power of Generators In KW
8. Material / Weight Spare Propeller / Tailshaft, if any?
9. Description of Propeller (Type/Material) Etc.,
10. Material & Weight of Permanent Ballast (If Any)
11. Material & Weight Of Insulation (If Any)
12. Delivery Mode (OWN POWER or UNDERTOW)
13. Delivery Dates & Price Idea
14. Last Cargoes Carried by the Vessel
15. Removals (If Any)
16. Operating condition of Major Machinery
17. Single Skin or Double Skin
18. Double Bottom Tanks / Wing Tanks
19. Reefer Space, if any
20. Owner of The Vessel
21. Inspection is available or not ?
22- Store and Spare Parts Positions.
23. Photographs, if any.

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